The Benefits of Digital Marketplaces

In the past few decades, the benefits of digital marketplaces have become clear. We’ve seen different types of marketplaces redefine many of the ways people live and transact. Companies like eBay, Airbnb, Uber, Lyft, Etsy, Postmates, and Instacart have skyrocketed and spurred new societal trends like the gig economy, microentrepreneurship, and new forms of creativity. 

Venture investors have noticed. Marketplace startups are one of the biggest sectors for venture capital investment, with record breaking investment numbers in 2021 to an all-time high of $139B. Marketplace unicorns have grown 70% in value since Jan 2020 to more than $5 trillion, outperforming tech overall. As of April 2021, more than 370 marketplace unicorns have been created globally, yet the future and models of online marketplaces continue to evolve. 

Several key characteristics of online marketplaces stand out:

Network effects

Most types of marketplaces marketplaces benefit from network effects, where each new user on either side makes the platform more valuable for users on the other side. This creates a virtuous cycle, where seller growth drives buyer growth, which in turn drives more seller growth. Every restaurant that joins OpenTable creates increasing value for customers who can now search through more available reservations, and every driver that Uber adds gives riders more availability and options for rides. These network effects help create a competitive moat for startups, providing barriers for exit for existing users and barriers to entry for new companies.

Technology (zero marginal cost)

Technology is a second key advantage. The rise of marketplaces can be attributed in part to leveraging technology to connect buyers and suppliers directly and efficiently. As tech costs have decreased, new services have emerged across a wide range of niches, unlocking new communities and experiences. Cameo, for example, created a platform for connecting celebrities and fans by building a marketplace for custom shoutouts. After being launched in 2017, it quickly expanded and now is considered a unicorn startup valued at over $1B.

Capital efficiency

Marketplaces also benefit from having no inventory (in most cases). This makes it cheaper to operate for the marketplace, more scalable since there’s no physical infrastructure, and more flexible to pivot or expand. Airbnb does not have to pay to maintain hotels or build new properties, and was able to add new customers and offerings more quickly than a traditional hotel ever could.

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